By Kathleen Day
Washington Post Staff Writer
Thursday, November 2, 2006; A01
CVS Corp., the nation's second-largest drugstore chain, has agreed to acquire pharmacy-benefit manager Caremark Rx Inc. in a $22.5 billion deal that would create a company with unprecedented clout to bargain with drugmakers for lower prices.
The transaction, which requires approval from shareholders and federal antitrust regulators, would result in a company with $75 billion in annual revenue and more than 6,200 retail stores in 43 states, including 240 in the Washington region.
The new company would be called CVS/Caremark Corp. and become what analysts said would be the biggest private-sector buyer of prescription drugs, responsible for filling or managing more than 1 billion prescriptions a year.
CVS and Caremark officials called the combination a "logical evolution" in the pharmaceutical industry that could help contain runaway drug costs.
"It gives them leverage over the drugmakers," said Mitchell P. Corwin, an equity analyst for Morningstar Inc. "It's likely to lead to more transparent pricing and keeping prices down."
Other industry experts said the reduced costs might not be fully passed along to consumers and businesses. That would depend on whether the company shares its cost savings or uses them to boost its own profits, said Helen Darling, president of the National Business Group on Health, a nonprofit organization of large employers.
Yesterday's announcement came just a month after Wal-Mart Stores Inc. announced that it would charge $4 per prescription for generic drugs. The program, which covers 314 drugs, is being rolled out nationwide and arrived in the Washington area last week.
During a conference call with Wall Street analysts, the chief executives of CVS and Caremark said merger talks began with a dinner conversation a year ago, well before Wal-Mart's announcement.
CVS chief executive Thomas M. Ryan and Caremark chief executive Edwin M. Crawford dismissed Wal-Mart's generic discounts as a "pricing promotion" and said their combined companies would bring more fundamental changes to the pharmaceutical marketplace.
Ryan and Crawford, promising lower prices, said the new company would provide more choices by enabling consumers to use mail, the telephone, the Internet or visits to retail stores to fill prescriptions.
"We'll be agnostic [about] where the consumer fills their prescription," Ryan said.
Pharmacy benefit managers such as Caremark operate drug programs for companies, negotiating lower prices from manufacturers and setting employee co-payments. They also buy drugs in bulk and distribute them by mail order. Employers are increasingly making mail-order plans mandatory to cut costs.
Caremark, which is based in Nashville and has more than 13,000 employees, is one of the two largest managers of employer drug-benefit plans, the larger being Medco Health Solutions Inc. CVS has had a small benefit management unit, but analysts said it was not growing as fast as the company wanted.
"It's another example of consolidation in the health-care industry, in this is case pharmaceuticals," Darling said. "It should bring more bargaining power."
The deal, which the companies hope will be completed within a year, calls for CVS to swap 1.67 of its shares for each share of Caremark. Based on the closing price the day before the deal was announced, the deal is worth $22.5 billion. The new company would be headquartered in Woonsocket, R.I.
Some Wall Street analysts questioned whether the two companies would fit together as well as executives claimed. Shares of CVS fell $2.32, to $29.06. Caremark fell $1.06, to $48.17.
Also yesterday, CVS announced that third-quarter earnings rose 12 percent, to $284.2 million, on higher sales of generic drugs. Revenue rose 25 percent, to $11.21 billion.
The aging U.S. population increasingly relies on prescription drugs to prevent or treat illness. That has led to consumers paying higher out-of-pocket costs for drugs as wages have remained flat.
Health-related costs rose an average of 9.6 percent a year from 2000 to 2004, while inflation averaged 2.6 percent. Drug prices, which rose an average of 11.4 percent a year over that time, are a significant factor in rising health expenses.
In 2005, prescription drug expenditures totaled $251.8 billion, according to industry figures, up 5.4 percent from the preceding year. But how individual prescription drugs are priced has for decades been difficult to determine because drug companies have not shared that information.
News of the planned merger of CVS and Caremark was greeted optimistically by a competitor, the nation's largest drugstore chain, Walgreen Co.
"I think it can be a positive for the retail pharmacy industry as whole" because it gives it more control over distribution channels, said Michael Polzin, a Walgreen spokesman. "Anything that increases retail pharmacies' influence on prescription management is a good thing."
Mail-order business has been growing faster than sales in stores for several years, largely under the direction of pharmacy benefit managers like Caremark encouraging consumers to use the service for 90-day supplies of their regular medications.
But last year, Polzin said, that trend broke. The number of retail pharmacy prescriptions rose 8.5 percent, while mail-order prescriptions rose 7.4 percent. That is partly due to pharmacy benefit managers moving away from requiring people to fill their prescriptions by mail.
Some retailers -- including Target Corp. and Wegmans Food Markets Inc. -- have followed Wal-Mart's lead in lowering some generic-drug prices. Walgreen and other pharmacy chains have not.
Staff writer Ylan Q. Mui contributed to this report.